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ARE ESTATE PLANNING LEGAL FEES TAX DEDUCTIBLE?

tax deductibleAlthough this author is not an accountant (and one should discuss his or her own individual tax situation with his or her personal accountant), I am often asked if estate planning fees are tax deductible. The answer is sometimes it is, and sometimes it is not.

Section 262 of the Internal Revenue Code (IRC) disallows deductions for personal, living, or family expenses, but IRC Sections 162 and 212 allow deductions for expenses that are business and investment related. Estate planning legal expenses might be able to be deducted under IRC Section 162 if they are connected with a trade or business, or such expenses can be deducted under IRC Section 212 if connected with determination of any tax.

However, trade or business expenses incurred under IRC Section 162 by employees and expenses deductible under IRC Section 212 are subject to limitations based on the adjusted gross income (AGI) of the taxpayer and are only deductible as miscellaneous itemized deductions to the extent it exceeds 2% of AGI.

Fees associated with tax planning advice (i.e., minimizing estate or income taxes), tax return preparations, and resolution of tax return audits could be a deduction under IRC Section 212. Thus, estate planning legal expenses or fees could be a tax deduction, but it would be only deductible to the extent it is allocable to tax planning. Furthermore, since many taxpayers do not itemize and since miscellaneous itemized deductions often do not exceed 2% of AGI, many taxpayers will receive no benefit from these deductions. Furthermore, IRC Section 68 phases out itemized deductions for taxpayers with higher incomes (joint returns with AGI above $309,900 and single filers with AGI over $258,250). Total itemized deductions are reduced by 3% by which the AGI exceeds these thresholds.

In conclusion, the determination if estate planning legal fees is tax deductible or not and to what extent should be determined on a case-by-case basis.

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